Abstract:

China has taken first steps hinting at an internationalization of the Renminbi: The country has begun cautious action for opening up its capital account and allowed currency fluctuations within a certain limit between 2005 and 2008. Promoting Hong Kong as a test center for the Renminbi's internationalization is pointing in the right direction because it at least makes an offshore Renminbi market possible. Therefore, the silent re-pegging of the Renminbi to the US Dollar in 2008 was a step back. Instead of binding the Renminbi again to a foreign currency, China should gradually enable more trade with the Renminbi. Independent monetary policy and free foreign currency trading are two key pillars of the modern financial world. Liberalizing the capital account is a gradual process and should go hand in hand with the establishment of a strong Chinese financial sector. As soon as this financial sector can absorb foreign capital in a flexible, independent way, the Renminbi stands a good chance to develop into an appreciated international currency.